Brief Equities Bottom-Up: Kosmos Energy: The Standout Internationally-Focused E&P Company and more

In this briefing:

1. Kosmos Energy: The Standout Internationally-Focused E&P Company
2. Tesla: Would the Last One Off the Sinking Ship Please Turn Off the Lights?
3. Amarin–Our Talks With The CEO & An Update on New Trial Data Released at ACC Conference
4. Lasertec (6920 JP): Pricing in Long-Term Growth
5. Micron: Things Are Bad, and Getting Worse!

1. Kosmos Energy: The Standout Internationally-Focused E&P Company

We think that Kosmos Energy (KOS US) offers everything that is required from an internationally focused E&P company. It has a highly rated management team, strong balance sheet and free cash flow generation from its existing producing assets, low risk / high value near field exploration potential, selective high risk / reward frontier exploration in which it has a proven track record, it has done recent value accretive acquisitions with room for more, it has demonstrated the ability to farm-down its assets on multiple occasions and is currently in the process of a major asset sell down, which could surprise the market to the upside. Despite this the stock trades on a significant discount to risked NAV, making it a potential acquisition target and has plenty of catalysts coming up this year to close the valuation gap.  

2. Tesla: Would the Last One Off the Sinking Ship Please Turn Off the Lights?

Roughly nine months ago, as Elon Musk was bizarrely attacking one of the heroes of the Thai rescue mission, we noted in Tesla: As Musk’s Reputation Disintegrates, The Only Positive for the Stock Is Disappearing that

We think it is pertinent to identify the moment when the crowd turns… and we think it just happened.

concluding that

Our main point is that there is now significantly more risk of being long and wrong on Tesla, not just in terms of portfolio performance, but in terms of career risk. With Tesla’s rising profile and increasingly bizarre behaviour the ability to justify being long and wrong is diminishing rapidly.

Since then, the roller-coaster ride has, if anything, been even more volatile and the vehemence of both bulls and bears has not decreased.

With recent developments such as the collapse in unit volumes following the reduction of subsidies for Tesla, the departure of CFO Deepak Ahuja and the underwhelming Model Y reveal, we highlight what we believe are the most important indicators of failure amongst the deluge of bad news, below.

3. Amarin–Our Talks With The CEO & An Update on New Trial Data Released at ACC Conference

• Strong Q1 to Come: We recently had a call with Amarin’s CEO, John Thero, and update our model with quarterly estimates. Q1 should see revenue growth of +55% YoY to $68m, an operating loss of -$30m, and EPS of  -$0.09. Consensus is at $66m, -$38m, and -$0.12, respectively. 
• ACC Event Leads to Stock Drop: Amarin released “late-breaking” results from its Reduce-It trial at the American College of Cardiology (ACC) conference last Monday. While the data was considered “landmark” by doctors in attendance, the stock has fallen by nearly 14% since the event, showing a clear disconnect between the market and the medical community. 
• New Data Upgrades Risk Reduction to 30% & Shows Strong Prevention of CVD Recurrence: The key data at the ACC showed that Vascepa has a 30% relative risk reduction (RRR) rate for total CVD events (initially, it was 25% RRR rate for “major adverse” CVD events). Additionally, it was discovered that Vascepa reduced secondary CVD events by 32%, third events by 31%, and fourth events by 48%. 50% of patients who have experienced a cardiovascular event have a recurrence within one year, while 75% have recurrences within three years.  
• New Data Should Fast-Track Label Expansion & Impact Earnings Significantly: Doctors on a panel discussion after Amarin’s presentation at the ACC were dazzled by the data, saying that it will change the way CVD is treated in the US. We got the sense that this should lead to the FDA giving Vascepa “fast-track” (6 months vs regular 10 months) treatment for label expansion, which will surely lead to higher revenues this year and an expanded market henceforth.  
• New Prescriptions up 62% YTD: Amarin’s CEO, John Thero, told us he has more talks with doctors about Vascepa these days than he does with investors, which highlights increasing interest in the US medical community over Vascepa and explains the new prescription growth of +62% year-to-date. Successful label expansion by the FDA should widen Vascepa’s addressable market by nearly 20x.  
• Our Talks With CEO Point to a Strong Q1: The first quarter is seasonally slow, but our impressions from our talk with CEO John Thero is that the company is most likely outperforming its internal targets for Q1 growth. Amarin assumes 53% sales growth for the full year, but has stated that Q1 should be “seasonally slower”. Weekly prescription data show that Vascepa is growing over 50% in the seasonally slow Q1. Sales should pick up from Q2 and surge in the usual peak season of Q4.
• 2019 Revenues should Reach $500m (+120% YoY): We see 2019 revenues of $503m, with operating profit of $88m (17.5% operating margin) and EPS of $0.23. Consensus sees sales of $363m (guidance is at $350m), with an operating loss of -$58m and EPS of -$0.17. 
• Buyout Possibilities Remain High: We continue to see Amarin as one of the most attractive buy-out candidates among big pharma companies in the CVD field. Because Vascepa is a treatment taken in conjunction with statin medication like Lipitor, Pfizer appears like the most likely suitor, although there many others. 
• For more details about Amarin, its Reduce-It trial, and potential global sales, please refer to this in-depth report Amarin–2019’s Biggest Buyout Target for Big Pharma

4. Lasertec (6920 JP): Pricing in Long-Term Growth

Lasertec hit a new high in the semiconductor stock rally that followed Micron Technology’s March 20 earnings call. On Friday, March 22 (March 21 was a holiday in Japan), Lasertec was up 8.4% to ¥4,900. At this price, the shares are selling at 42x our EPS estimate for FY Jun-19, 36x our estimate for FY Jun-20 and 31x our estimate for FY Jun-21. On a 5-year view, earnings growth could bring the projected P/E multiple down to 21x, in our estimation.

Following strong 1H results, management left FY Jun-19 sales and profit guidance unchanged, but raised semiconductor-related orders guidance by 13% while cutting  orders guidance for FPD-related and other products by nearly 40%. Total new orders guidance was raised from ¥37 billion to ¥39 billion, compared with sales guidance of ¥28 billion, implying an increase in the order backlog from ¥39.9 billion to ¥50.9 billion.

With this in mind, we have raised our sales and profit estimates for FY Jun-20 and added new, higher estimates for FY Jun-21 and beyond. Rising demand for EUV mask blank and mask defect inspection equipment should drive an increase in total sales from ¥29 billion this fiscal year to ¥38 billion in FY Jun-21, and approximately ¥50 billion in FY Jun-23. Over the same period, operating profit should rise from ¥7.0 billion to ¥9.5 billion, and then to approximately ¥14 billion.

Risks for investors include the potential delay or reduction of orders and shipments (as just happened with FPD inspection equipment), high volatility in quarterly orders, sales and profits, and extended valuations.

5. Micron: Things Are Bad, and Getting Worse!

Today’s Micron earnings call underscored how difficult the memory business is getting, and the company’s guidance indicated that this is only the start of it.  Revenues for 2FQ19 were down 26% Q/Q at $5.8 billion, and the company projects 3QF19 revenues to fall to $4.8 billion.